Title and escrow basics form the foundation of every real estate transaction. Buyers and sellers hear these terms constantly, but few understand what they actually mean. A title proves who owns a property. Escrow protects both parties during the sale. Together, they create a secure path from offer to closing. This guide breaks down title and escrow basics with clear examples anyone can follow. Whether someone is buying their first home or selling a property, understanding these concepts saves time, money, and stress.
Key Takeaways
- A title proves legal ownership of a property, while escrow protects both buyers and sellers by holding funds and documents until all conditions are met.
- A title search uncovers hidden issues like unpaid liens, back taxes, or ownership disputes before closing, preventing costly legal problems.
- Title insurance provides long-term protection against defects discovered after closing, and experts recommend buyers purchase both lender’s and owner’s policies.
- The escrow process follows clear steps: opening escrow, meeting contingencies, collecting documents, final review, and closing with fund disbursement.
- Title and escrow basics work together seamlessly—title verifies clean ownership while escrow manages the transaction’s money and paperwork.
- Understanding these title and escrow basics examples helps buyers and sellers navigate real estate transactions with confidence and avoid common pitfalls.
What Is Title in Real Estate?
A title represents legal ownership of a property. It’s not a physical document, it’s the right to own, use, and transfer real estate. Think of a title as proof that someone can legally sell a home.
When a buyer purchases property, the title transfers from the seller to the buyer. This transfer must be clean and clear. A “clean title” means no one else has claims against the property.
Title Search: Finding Hidden Problems
Before closing, a title company performs a title search. This search examines public records to find potential issues. Common problems include:
- Unpaid liens: A contractor might have placed a lien for unpaid work.
- Back taxes: The property may have outstanding tax debts.
- Ownership disputes: A previous owner’s heir might claim partial ownership.
- Easements: A utility company might have rights to access part of the land.
For example, imagine Sarah wants to buy a house. The title search reveals the previous owner never paid a $15,000 contractor bill. That contractor filed a lien. Sarah’s title company catches this issue before closing. The seller must pay off the lien, or Sarah walks away from a potential legal nightmare.
Title Insurance: Protection Against Surprises
Title insurance protects buyers and lenders from title defects discovered after closing. Even thorough title searches can miss problems. A forged document from 30 years ago might surface. A missing heir could appear with ownership claims.
Lenders require a lender’s title insurance policy. Buyers can also purchase an owner’s title insurance policy. This one-time premium provides coverage for as long as they own the property. Most title and escrow basics guides recommend buyers get both policies.
Understanding the Escrow Process
Escrow is a neutral holding arrangement. A third party, usually an escrow company or title company, holds money and documents until both parties meet their obligations. Neither the buyer nor seller controls the funds directly.
The escrow process protects everyone involved. Buyers don’t hand over money until all conditions are satisfied. Sellers don’t transfer ownership until payment is secured.
How Escrow Works Step by Step
- Opening escrow: After the buyer and seller sign a purchase agreement, escrow opens. The buyer deposits earnest money, typically 1-3% of the purchase price.
- Meeting contingencies: The buyer completes inspections, secures financing, and reviews disclosures. The seller addresses any repair requests.
- Document collection: The escrow officer gathers all required paperwork. This includes loan documents, title reports, and transfer deeds.
- Final review: Both parties verify all conditions are met.
- Closing and disbursement: The buyer signs loan documents and transfers funds. The escrow company pays the seller, real estate agents, and any other parties. The deed transfers to the buyer.
Real Escrow Example
Consider Mike and Jennifer selling their condo to Tom. Tom offers $350,000. He deposits $10,000 in earnest money into escrow. Over the next 30 days, Tom gets a home inspection and finalizes his mortgage. The escrow officer collects all documents. On closing day, Tom’s lender wires funds to escrow. The escrow company pays Mike and Jennifer, minus closing costs and their existing mortgage balance. Tom receives the keys and the title transfers to his name.
Title and escrow basics like this example show how the process protects everyone.
How Title and Escrow Work Together
Title and escrow services often come from the same company, and for good reason. They’re deeply connected. The title side verifies clean ownership. The escrow side manages the transaction’s money and documents.
Here’s how they coordinate:
- The title company performs the title search while escrow is open.
- If the title search finds problems, escrow cannot close until they’re resolved.
- Title insurance is issued at closing, which escrow facilitates.
- The escrow officer ensures title documents are properly signed and recorded.
A Combined Example
Let’s say David buys a duplex for $425,000. His title and escrow company handles both functions. The title team discovers an old mortgage that was paid off but never officially released. This cloud on the title must be cleared. While David’s escrow stays open, the title team contacts the previous lender. They obtain a release document. Once filed, the title is clear. Escrow proceeds to closing. David gets his title insurance policy, and the deed records in his name.
This coordination explains why many states use combined title and escrow companies. Buyers and sellers deal with one entity instead of two.
Common Title and Escrow Examples in Home Buying
Understanding title and escrow basics becomes easier with specific scenarios. Here are situations buyers and sellers commonly encounter:
Example 1: The Lien Discovery
A buyer offers $280,000 for a townhouse. The title search reveals a $12,000 IRS tax lien against the seller. The escrow company calculates that after paying the lien, the seller still nets enough from the sale. At closing, escrow pays the IRS directly from the seller’s proceeds. The title transfers clean to the buyer.
Example 2: The Earnest Money Dispute
A buyer deposits $8,000 in earnest money. During the inspection period, they discover major foundation issues. The buyer cancels within their contingency window. The escrow company returns the full earnest money to the buyer. If the buyer had canceled without a valid contingency, the seller might have claimed those funds.
Example 3: The Boundary Issue
A title search reveals an encroachment. The neighbor’s fence sits two feet onto the property being sold. The title company identifies this through a survey. The buyer negotiates a price reduction to account for the lost land. Title insurance excludes coverage for the known encroachment. Escrow closes with the adjusted terms.
Example 4: The Refinance Escrow
Title and escrow basics apply beyond purchases. When homeowners refinance, they use escrow too. The new lender requires a title search to confirm no new liens exist. An escrow officer coordinates payoff of the old mortgage. The new loan funds through escrow. The homeowner never handles the money directly.
